Lakeland Financial Services provides outsourcing services for three areas: payro
ID: 2462830 • Letter: L
Question
Lakeland Financial Services provides outsourcing services for three areas: payroll, general ledger (GL), and tax compliance. The company is currently contemplating the elimination of the GL area because it is showing a pre-tax loss. An annual income statement follows. Lakeland Financial Services Income Statement by Service Line For the Year Ended July 31, 2013 (in thousands) Payroll GL Tax Total Sales $ 4,378 $ 3,218 $ 3,581 $ 11,177 Cost of sales (2,781) (1,981) (2,141) (6,903) Gross margin $ 1,597 $ 1,237 $ 1,440 $ 4,274 Avoidable fixed and variable costs $ 1,247 $ 1,504 $ 1,024 $ 3,775 Allocated fixed costs 194 149 214 557 Total fixed costs $ 1,441 $ 1,653 $ 1,238 $ 4,332 Operating profit $ 156 $ (416) $ 202 $ (58) a. Should corporate management drop the GL area? Gross margin GL services $ Avoidable fixed and variable operating costs Segment margin $ b. If the GL area were dropped, how would the company’s pre-tax profit be affected?
Explanation / Answer
Answer a GL should be drooped since the contribution margin comes negative 267.
GL
Sales
3218
Cost of sales
-1981
Gross margin
1237
Avoidable fixed and variable cost
-1504
Operating profit
-267
Answer b on removal of GL operating profit will come positive 209 from negative 58
Payroll
Tax
Total
Sales
4378
3581
7959
Cost of sales
-2781
-2141
-4922
Gross margin
1597
1440
3037
Avoidable fixed and variable cost
-1247
-1024
-2271
Allocated fixed cost
-194
-149
-214
-557
Operating profit
156
-149
202
209
GL
Sales
3218
Cost of sales
-1981
Gross margin
1237
Avoidable fixed and variable cost
-1504
Operating profit
-267
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